MADRID (MNI) – Spain’s Economy Minister Luis de Guindos Monday sent
a letter to Eurogroup President Jean-Claude Juncker formally requesting
aid to assist with the recapitalization of Spanish banks that need it,
the ministry said in a statement.
The request had been widely expected after Spain agreed at a
Eurogroup meeting earlier this month to seek recapitalization assistance
of up to E100 billion.
De Guindos said the precise form of the aid will be decided taking
into consideration “the different possibilities currently available and
those that might be decided in the future.” The comment seems to suggest
that Spain is holding out hope that European leaders will ultimately
agree to allow Europe’s bailout fund, the European Stability Mechanism,
to fund banks directly rather than being required to channel the loans
through the government.
Under current statute neither the ESM nor the temporary bailout
fund it will be replacing, the European Financial Stability Facility
(EFSF), is allowed to inject capital directly into banks. Unless that
changes, the bank aid to Spain would add to the Madrid government’s
debt, with worrying implications for its ability to continue servicing
it.
That is one of the main reasons why markets pushed Spanish
sovereign yields sharply higher after the initial announcement of an
agreement on bank aid. Another worry weighing on the market is the
insistence by some – particularly Germany – that the aid come from the
ESM rather than the EFSF. The ESM would have senior creditor status,
thus pushing private creditors to the back of the queue in the event of
a default.
In his letter to Juncker, De Guindos confirmed that Spain’s bank
restructuring agency, the FROB, would receive the aid funds and
distribute them to the banks needing them.
“The Spanish authorities will offer all of their support in
evaluating eligibility criteria, in the definition of financial
conditionality, in following up on measures to be implemented, and in
the definition of the financial aid contracts, with the goal of
finalizing a ‘memorandum of understanding’ before July 9, so it can be
discussed at the next Eurogroup meeting,” de Guindos wrote.
July 9 is also the date on which the ESM is supposed to become
operational, though it could be pushed back several days because of a
legal action pending against it in Germany.
De Guindos noted that in deciding the amount of aid required, two
independent audit reports issued last Thursday as well another report by
the International Monetary Fund would be the starting points.
The two independent audits, commissioned by the Spanish government,
showed Spain’s banking sector would need between E16 billion and E26.5
billion in a baseline economic scenario and between E51 billion and E62
billion in a “stressed” scenario where economic activity and housing
prices fell further than currently anticipated. The IMF reported an
aggregate capital need of around E40 billion for Spanish banks.
However, the rating agency Fitch, calling for higher core Tier 1
capital buffers than assumed in the two independent auditors’ reports,
said on Friday that Spanish banks would need up to E60 billion in the
baseline scenario and up to E100 billion in the pessimistic one.
–Paris bureau, +331-42-71-55-40; bwolfson@marketnews.com
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